"Foreigners' Short-Term Shopping of Korean Stocks" Insufficient to Lead Exchange Rate Stabilization Amid Soaring Ceiling

When Choosing Dollar Funds, "Possibility of Inflow into Export-Oriented Country Korea Stock Market"

[Asia Economy Reporter Lee Seon-ae] As the value of the dollar soars to unprecedented heights, foreign investors are returning to the Korean stock market. With the selling pressure from foreigners, which had fueled the dollar's strength, now subsiding, attention is focused on whether the shift to net buying and its sustainability can lead to a decline in the won-dollar exchange rate. However, the financial investment industry largely views the foreigners' shift to net buying as a 'short-term phenomenon' due to ongoing domestic and international challenges such as interest rate hikes and economic recession. Nonetheless, if an environment is created where the unilateral strength of the dollar is controlled, it is predicted that dollar funds will flow into export-oriented countries like Korea, currently the most attractive among global stock markets.

According to the Korea Exchange on the 26th, foreign investors sold a staggering 16.1768 trillion won worth of stocks in the KOSPI market from January to June. The foreign ownership ratio also plummeted to levels seen during the global financial crisis. According to the Financial Supervisory Service, as of the end of June, the foreign ownership ratio of domestic stocks was 26.4%, the lowest since April 2009 (26.0%).

However, from July, foreigners have shifted to net buying. Despite the continued rise of the dollar against the won, foreigners have turned to 'buying,' perceiving the surge in the won-dollar exchange rate to levels seen during the global financial crisis as a buying opportunity at the bottom. Foreigners have net purchased 1.212 trillion won worth of stocks so far this month.

Foreigners sell domestic stocks and seek dollars again, increasing demand for the dollar, which leads to a rise in the dollar's value. As a result, their relentless selling in the domestic stock market in the first half of the year is seen as having fueled the rise in the won-dollar exchange rate. Conversely, a rising won-dollar exchange rate encourages further foreign selling, as a weaker won reduces the relative attractiveness of investing in the domestic stock market.

There is considerable skepticism in the market about whether foreigners' 'buying' will continue. This is because concerns over economic recession are spreading, making it difficult for foreign investors' sentiment toward the domestic market to improve.

Kim Hyung-ryeol, Head of Research at Kyobo Securities, said, "The depreciation of the won stems from the strength of the dollar, so it is difficult to assign new significance to the foreigners' shift to net buying." He added, "With the policy stance maintained and an economic recession looming, the dollar's value will become even more pronounced." Park Sang-hyun, a researcher at Hi Investment & Securities, said, "Whether foreign buying continues depends on observing the trends in inflation and the situation in Ukraine."

However, in the future, dollar funds may find the Korean market attractive and choose it. Generally, when the dollar is strong, dollar funds prefer U.S. stocks, and when the dollar is weak, they choose emerging market stocks. Emerging market stocks are divided into two categories: commodity-exporting countries and export-oriented countries.

If the unilateral strength of the dollar is controlled and inflation continues to rise, funds may flow into the stock markets of commodity-exporting emerging countries. If the dollar's unilateral strength is controlled and inflation peaks, the stock markets of export-oriented emerging countries will become the mainstream choice. The Korean stock market exhibits characteristics of an export-oriented emerging country.

The stock markets of export-oriented countries currently have concentrated appeal. Due to past trade frictions, valuations are at rock-bottom levels. Most of these markets have already priced in an economic recession. Until recently, the strong dollar has provided significant export price competitiveness through exchange rates. This implies potential for fundamental improvements. In such a situation, if the dollar's unilateral strength is controlled, dollar funds will flow into these stock markets without concerns about exchange losses, creating momentum in supply and demand. Kang Hyun-ki, a researcher at DB Financial Investment, emphasized, "When dollar funds make their choices in the future, Korea could be included among the most attractive global stock markets," adding, "Therefore, it is necessary to reconsider the existing positive outlook on the Korean stock market and the enhanced appeal of export stocks."

This content was produced with the assistance of AI translation services.